Cayman is not a tax haven: Cayman Finance breaks down the characteristics of tax havens

May 20, 2021Blog

By Jude Scott, CEO, Cayman Finance

The Cayman Islands is a transparent, tax-neutral jurisdiction – not a tax haven.

The jurisdiction’s model of tax neutrality for financial services business has long been misunderstood, and when something is misunderstood, suspicion is not far behind.

These misperceptions around the jurisdiction have been perpetuated by the entertainment industry for decades, from box office hit legal thrillers in the early 1990s right up to commercials from a certain telecommunications company as recently as 2019. They have further been advanced by NGOs on a mission to eliminate international financial centres.

The Cayman Islands is an international financial centre that prides itself on global recognition of its commitment to principles of openness and transparency and we intend to use the facts about our jurisdiction to combat this misinformation, so onward we must go with our educational campaign.

What is a tax haven?

The OECD (which is committed, amongst other things, to fighting international tax evasion) has defined a tax haven as follows:

“Tax haven in the ‘classical’ sense refers to a country which imposes low or no tax and is used by corporations to avoid tax which otherwise would be payable in a high-tax country. According to an OECD report, tax havens have the following key characteristics; No or only nominal taxes; Lack of effective exchange of information; Lack of transparency in the operation of the legislative, legal or administrative provisions.”

Let’s break this down.

Tax haven characteristic 1: No or only nominal taxes

Conclusion: Cayman does not pose a risk

The OECD has itself stated that “no or nominal tax is not sufficient in itself to classify a country as a tax haven”. In addition, here are a few reasons and examples as to why Cayman is not a tax haven according to this characteristic:

  • Cayman has an effective tax system whereby total government tax revenues as a percentage of GDP are similar to tax rates in G20 countries and sufficient to fund government operations. Therefore, additional taxes such as corporate income taxes have never been necessary.
  • Cayman has transparent effective tax rates.
  • Cayman does not have different tax rates for foreign entities.
  • Cayman does not have legal mechanisms or treaties (such as double taxation agreements) in place with other countries to legally transfer tax bases from one country to another in order to aggressively reduce taxes.
  • Cayman does not promote itself as a jurisdiction for aggressive tax planning.

Tax haven characteristic 2: Lack of effective exchange of information

Conclusion: Cayman does not pose a risk

The Cayman Islands has a long history of proactive cooperation and engagement with internationally accepted regulatory and information exchange standards, having signed its first Mutual Legal Assistance Treaty with the US back in the 1980s.

Additionally, Cayman exchanges tax information with more than 120 jurisdictions through tax information exchange agreement and multilateral agreements through Cayman’s adoption of US FATCA, the OECD Common Reporting Standard and Country-by-Country (CBC) reporting (source, source).

Tax haven characteristic 3: Lack of transparency

Conclusion: Cayman does not pose a risk

The Cayman Islands is a transparent jurisdiction.

Cayman adheres to the same high global standards for transparency and cross-border cooperation as G20 countries and other top international financial centres (IFCs). Cayman has been rated “Largely Compliant” (the second highest of a six-tier rating) by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, the same rating given to the UK, Germany, Italy and the US.

Cayman has operated a verified beneficial ownership regime for over 20 years that provides for due diligence and know-your-customer checks by licensed regulated corporate service providers. This system is critical to aiding proper law enforcement authorities as they conduct legitimate investigations and is superior to self-reporting systems adopted by other countries.

In 2019, the OECD completed a review of the Cayman Islands’ domestic legal framework (source) that includes economic substance and found that the Cayman Islands Tax Neutral regime is not harmful and meets all economic substance requirements.

Finally, the Cayman Islands does not permit shell companies, bearer shares or anonymous numbered bank accounts.

The Cayman Islands’ tax model

So, if the Cayman Islands isn’t a tax haven, why is it such an attractive place for global financial services business?

The key is that our globally responsible tax model is simple and transparent. Cayman is an optimum optimal tax-neutral jurisdiction supporting efficient, free flow of trade, capital, investments, financing, and services around the world without posing harm to other countries’ tax bases.

By using the Cayman Islands as a tax-neutral financial hub, parties from different countries, which have different laws, regulations, tax rules and customs, are able to do business with each other in a trusted, efficient and neutral jurisdiction, without disadvantaging either party. Investors are still subject to their home jurisdiction’s tax requirements, but Cayman does not add an additional layer of taxation on the proceeds from their investments – in other words, there is no risk of double taxation and no tax conflict.

The Cayman Islands is recognised by international policymakers as a strong partner in combatting corruption, money-laundering and terrorist financing, and has a long and demonstrated history of commitment to transparency, compliance with international standards and cross border cooperation with law enforcement. In short, these commitments make Cayman an unattractive destination for those looking to evade or avoid taxes in their home jurisdictions.

There are valid legal, regulatory and legislative reasons that clearly demonstrate Cayman is a transparent, tax-neutral jurisdiction and not a tax haven.

Cayman Finance continually explores this and related topics on its LinkedIn and Twitter feeds, so check them out for more factual information about why the Cayman Islands is not a tax haven but a tax-neutral jurisdiction supporting global economic growth and recovery.

About the author

Jude Scott is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media.

He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young.

As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm.

Having served on various Cayman Islands Government and private sector committees, including the Cayman Islands Financial Services Council, the Cayman Islands Society of Professional Accountants, the Education Council, the Insolvency Rules Committee and the Stock Exchange, Jude has attained extensive experience within the Cayman Islands’ financial services industry.

He has served as the CEO of Cayman Finance since 2014, and is committed to protecting, promoting, developing, and growing the financial services industry of the Cayman Islands.

 

 

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